Numerous agriculture enterprises are adaptable to small acreage tracts. Both livestock and specialized crops can be compatible on land from five to 160 acres. There are several reasons to create an agriculture enterprise even if you are a novice with crops or livestock.
Why Become Involved in Agriculture
- Maintain a more desirable tax classification for agriculture versus residential classification (see Agriculture Production and Tax Classification section).
- Many people enjoy “farming” or “ranching” as a satisfying hobby. Social activities associated with these activities can provide a great personal satisfaction.
- Careful attention to the costs of agriculture hobbies can produce a positive financial return. Usually these returns are small on an investment basis (less than 5%). However, specialty livestock and crops can occasionally have a significant return on investment if a niche market is found.
- Livestock (sheep and cattle) are good collateral for loans. They are fairly liquid investments and can be used as a form of qualified expenses to savings.
- Taxable income may be reduced by qualified expenses to agricultural enterprises that would not be considered tax deductible without the agricultural enterprise. Check IRS rules as they have extensive definitions of what a “farm” is versus a “hobby.”
Drawbacks to Small-Scale Agriculture Enterprises
- The economy of scale can make marketing of crops and livestock less economical than larger producers. Direct expenses (i.e., feed, marketing, veterinary supplies, etc.) can be higher for smaller quantity purchases, which can harm the profitability of the enterprise.
- Most small-scale agriculture enterprises require various forms of equipment that are not utilized to their potential; thus capital equipment expenditures (i.e., tractors) may be over-purchased.
- Custom hire of farm work (i.e., plowing, hay harvesting, etc.) usually costs the small farmer more as the custom farmer cannot afford to charge usual and customary rates on small parcels.
- Agriculture, particularly livestock, can be highly labor intensive at certain times of the year. This demand for labor competes with individual recreational and off-farm employment demands.
- Most small-scale agriculture does not have the economy of scale to minimize risk. For instance, a hail storm, livestock disease, or death can be extremely damaging to the enterprise. There is not enough size and scale to spread the normal risk of agriculture enterprises.